Opinion: Risk of lower Kiwi$ next week as RBNZ cut may be big

By Danica Hampton The New Zealand has spent the past 24 hours consolidating within a 0.5500-0.5625 range. The USD slipped lower last night amid glimmers of hope from the banking sector and Eurozone data helped ease risk aversion. Barclays said its first quarter profits were well ahead of last year and it plans to resume paying dividends. Credit Suisse also posted a US$1.7b profit, more than double expectations. Meantime, the Eurozone's services and manufacturing PMIs printed on the stronger side of analyst expectations. Strong demand from Middle Eastern and Eastern European accounts propelled EUR/USD and GBP/USD sharply higher; which contributed to the generally weaker USD tone. Against a broadly weaker USD, NZD/USD rebounded from below 0.5550 to above 0.5600. As regular readers will know, we still think the market is underestimating scope for further RBNZ policy easing and as a result we see downside risks to NZ interest rates and the NZD/USD. NZ-US 3-year swap spreads have narrowed about 15bps already this week, from 2.35% to 2.20%. The narrowing of NZ-US interest rate spreads has seen the "˜fair value' range for NZD/USD (according to our short-term valuation model) fall from 0.5500-0.5750 to around 0.5450-0.5650 already this week. While we continue to think NZD/USD will head lower into to next week's RBNZ decision, we're not expecting to see much currency weakness today. With the US Treasury scheduled to reveal its "˜stress testing' methodology tonight and the G7/G20 meeting over the weekend, we suspect many investors will be looking to square up positions as the week draws to a close. As a result, we expect dips will be limited to the 0.5520-0.5540 region. Initial resistance is seen ahead of 0.5650, but a break above this level will suggest the gains will be extended towards 0.5700. The USD slipped against the major currencies last night, as better than expected European data and upbeat banking news helped soothe risk aversion a tad. While still soft in an absolute sense, last night's Eurozone data printed on the stronger side of expectations. Services PMI rose to 43.1 in April (vs. 41.4 forecast) and the manufacturing PMI rose to 36.7 (vs. 34.7 forecast). Meantime, new industrial orders fell by just 0.6%m/m in February, better than the 2.2% drop forecast. Last night's European banking news was also fairly upbeat. Barclays said its first quarter profits were well ahead of last year, it made good profits and it plans to resume paying dividends. Following on from last week's forecast-beating results from US banks Goldman Sachs and JP Morgan Chase, Credit Suisse also posted a US$1.7b profit, more than double expectations. Despite the glimmers of good news, global equities chalked up modest losses. The FTSE fell 0.31%, the DAX dropped 1.22% and the S&P500 finished up 1.0%. EUR/USD climbed from below 1.3000 to above 1.3100, supported by stronger than expected Eurozone data and some glimmers of hope in the banking system. Quasi-official names out of the Middle East and Eastern Europe were also reportedly heavy buyers of EUR and GBP last night. GBP/USD also recovered last night, after dropping sharply yesterday in the wake of the UK Budget, pushing up from around 1.4500 to nearly 1.4700. The CAD rose sharply against the USD last night after the Bank of Canada laid out a broad framework for unconventional stimulus measures, but stopped short of taking immediate action. The BoC outlined measures to purchase financial assets from the market and rescue the private sector credit market, but it also said it would be prudent and would not be taking any immediate action. With Canadian quantitative easing not imminent, USD/CAD slipped from nearly 1.2400 to below 1.2250. Against a generally weaker USD, USD/CHF slipped from above 1.1650 to below 1.1550 helped by comments from Swiss National Bank Vice-Chairman Hildebrand. While Hildebrand expects the downturn to hit the Swiss economy to hit hard in the second half of 2009, he urged "patience to let the medicine work" before more extreme steps like negative rates are adopted. Looking ahead, the US Treasury will reveal its "˜stress testing' methodology tonight and the G20 meet this weekend in Washington. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.